Cash ISAs vs Stocks and Shares ISAs

With George Osborne’s recent introduction of the Personal Savings Allowance (due to come into effect April 2016) savers can now earn up to £1,000 in tax-free interest on savings. But what can you do to maximise your savings pot?

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29 Nov 2015

By Will Davies

With George Osborne's recent introduction of the Personal Savings Allowance (due to come into effect April 2016) savers can now earn up to £1,000 in tax-free interest on savings. But what can you do to maximise your savings pot? When considering what should be included in a well-rounded savings portfolio, savers would do well to look towards ISAs. An ISA (Individual Savings Account) is one of the most tax-efficient ways to save or invest but which ISA product should consumers consider when exploring their savings options - a Cash ISA or a Stocks and Shares ISA? The answer to this question, which will pretty much determine your product selection, depends on your appetite, aversion or comfort with risk.

Cash ISAs are similar to standard savings accounts but with one key difference, the interest you earn is tax-free up to the annual ISA allowance - £15,240 for the 2015/16 tax year. Stocks and Shares ISAs enable individuals to put their money into a range of investments with the benefit of also being tax efficient (the 2015/16 tax allowance threshold is also £15,240).

But which one should savers choose? Or back to my original point, how much are you willing to risk? As with traditional investment in stocks and shares, there is always the potential that the value of your investment(s) may decrease. Conversely your investments could increase and gain a higher return than the Cash ISA given current interest rates. If you are considering making a stocks and shares ISA part of your savings portfolio you should factor in the longer time period as this is when these particular ISA products perform better - usually around five years.

Whilst interest rates may be historically low on cash ISAs, the value of your investment is guaranteed to increase. And, guarantees or certainty are a commodity the stock market does not deal in. A further advantage of Cash ISAs is their relatively short-term nature and ease of access thereby providing the option of cashing in if required.

As with all decisions, being comfortable with your choice and the possible outcomes is key but with the various ISA products on offer - adding to your savings pot needn't be a risky business but you can tread a riskier path if you choose to.

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AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year. As every advertisement for a savings product will contain an AER you will be able to compare more easily what return you can expect from your savings over time.